Inflation Asides

In 1977 I accidentally ran into a high school friend of mine who had taken
an advanced degree in mathematics and statistical analysis. He was working
for [Federal Reserve Chairman Arthur] Burn's Fed. He informed me that he was
working on a new methodology of calculating the inflation rate. When I asked
what it was based on he demurred saying it was "Classified Secret." I was truly
stunned. He did imply that, when done, the new methodology would greatly reduce
the reported value. Sure enough, during the Volcker Fed, the new methodology
was introduced and has been modified since then to greatly reduce the reported
numbers. It made the Volcker effort at controlling inflation seem much more
effective than it actually was.

However, if one takes 1965 as the starting year for the present acceleration
of inflation it can be shown that, on average, the cost of living has gone
up about 1400%. And, the total money supply has also grown - up to 2008 - about
the same. So, a person willing to do the research can always by-pass short-term
obfuscation and see the truth through widely available published costs of living.

Furthermore, there is qualitative inflation on top of the quantitative. Now,
the Fed constantly claims that a rise in costs is offset by a rise in quality
and so cancels out. This has been true in the field of micro-electronics. However,
in key areas of food and housing this is not so. In particular many food costs
have been hidden by a reduction in amount and quality of the item. Just look
at the reduction in the size of a can of tuna fish since 1965. The best tuna
has gone down from 8.5 to 5.0 oz while rising over 1600% in price while the
quality has suffered so that producers use every trick in the book to make
lesser cuts of the fish look like albacore. So the actual rise in price is
much, much more than the nominal rise.

Another thoughtful note from a reader:

Thanks for your good work. I just read your piece "Sick
Minds" on Safe Haven and it occurs to me that a price index should only
measure price changes of a fixed basket of goods. A consumer price index
should be based on how the median household spends its income at time A and
how those prices change going forward. That includes taxes! Another price
index should be generated for the median household of seniors.

The current gov't approved methods are for a subsistence price index (SPI).

Clearly the government can't be trusted to provide meaningful statistics and
this should be farmed out to universities. Government meddling into how the
statistics are generated should be outlawed. The universities should face peer
review on whatever series they are charged with generating. Get rid of the
BLS and the other government statistics generators and fund the universities
for this work.

My reply:

Thanks, I agree with what you write with one reservation: whether the academics
could be trusted. Celebrity economists - the Fedheads, Nobels, CNBC heroes
- would be the go-to "experts" who would fashion the peer structure. These
supercilious windbags already live off government money that funds their economic
departments, academic chairs funded by Interests (the Alan Greenspan Chair
in Economics at New York University, funded by hedge-fund manager John Paulson,
who made his fortune off the mortgage collapse), their web of memberships on
corporate boards, their insatiable appetite for continual exposure on CNBC,
the money they receive to write studies for vested interests (e.g., the Stiglitz,
Orzag(s) thumbs-up for Fannie Mae; Mishkin's celebration of Iceland's banking
system) - I hope that someday this scandal is seen for what it is, at which
point the academics could be trusted to establish such a peer review.

If we reached that point, we might also be able to trust the BLS, but I'm
with you in trashing it. I think Sir John Cowperthwaithe, Britain's financial
secretary to Hong Kong in the 1950s, was on to something. He did not allow
his government to collect statistics for fear the statistics themselves would
define policy. In the U.S., this is seen in our infatuation with "growth" no
matter the human and material wreckage choking in the gutter, a sure sign of
our government's and of the economic establishment's senility.

Sheehan serves as an advisor to investment firms and endowments. He is the
former Director of Asset Allocation Services at John Hancock Financial Services
where he set investment policy and asset allocation for institutional pension
plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and
quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S.
Naval Academy. He is a Chartered Financial Analyst.